Life insurance is something that can have tremendous benefits for your loved ones in the event of your death. Some people wonder if life insurance is a smart investment, and if so, which types of insurance make the most financial sense. This depends greatly on the specifics of your personal financial situation.

When people purchase life insurance policies, they pay premiums and, in exchange, when they die their beneficiaries will be provided with death benefit payouts in the form of a lump sum from the insurance company.

Life insurance is a way to help the people you love if you die, especially if they depend on you financially, whether wholly or partially. Some people also utilize life insurance as a savings tool. Life insurance might not be a good investment option for everyone, however.

Not all types of life insurance policies are the same. When someone talks about life insurance as an investment, they are typically referring to permanent life insurance, which can accumulate cash value, as opposed to term life insurance.

Different Types of Life Insurance

Life insurance generally falls into one of two categories. The first is term life insurance and the second is permanent life insurance.

Term life insurance is usually less expensive than permanent life insurance. Term policies provide only a death benefit, and it only pays if the policyholder dies while the term of the policy is still in effect. Policyholders buy it for a certain period, which is the term. This can vary and is usually anywhere from 5 to 30 years. The term has to be renewed if someone wants to continue coverage. It can also be converted to a whole life insurance policy.

Whole life insurance - also called permanent insurance - provides coverage for the duration of the policyholder’s life. Along with paying a death benefit, it also has a cash value accumulation that builds during the policy. It usually takes an estimated 12 to 15 years for that cash value to be substantial, and some people use whole life insurance as part of their overall estate plan and investment strategy.

With a whole life insurance policy, the premiums are going to be much higher but there is an investment component as there will be savings in the policy growing at an interest rate. Furthermore, if the insured person cancels, they will be refunded part of the insurance premiums they’ve paid.

There are also other features, known as riders, that can be attached to a life insurance policy. These can include things like a disability income rider, which provides supplemental income if the policyholder becomes totally disabled. There is also a children’s term rider so that you can add term life insurance coverage on all of your children. Riders are a way to customize life insurance to your specific needs or the needs of your family.

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The Case for Purchasing a Life Insurance Policy

For most people, the primary benefit of purchasing a policy from a life insurance company is the protection it provides to their family. Some of the cheapest term life insurance policies may only require a premium payment of around $10 a month, and your loved ones receive thousands of dollars in the event of your death. Most people would consider that a good return on investment, at least from the perspective of the family you would leave behind.

If you are the primary earner in your family, or even if you are an equal earner to your spouse or partner, a payout from a life insurance policy can significantly help your family if you die.

A case can also be made for the benefits of whole life insurance in terms of being an investment or retirement plan. As was touched on, it can be a way to accumulate cash value. The cash value is based on the return on investment, and a portion of that can be withdrawn during the life of the policy. It can also be borrowed during the life of the policy.

There tends to be a peace of mind element that comes with the purchase of a life insurance policy as well, and that can be invaluable. If you have saved relatively little money and you worry about your spouse or children in the event of your death, a life insurance policy can take away some of that worry.

There are some specific benefits of a whole life insurance policy as opposed to a term life policy. First, if you purchase a whole life policy as an investment, you get growth that’s tax-deferred. You’re not paying taxes on the interest or dividends earned on your life insurance until you make a withdrawal. This can be achieved with other investment accounts as well, however, such as an IRA.

With a permanent policy, you don’t lose your coverage after a period of time like you would if you buy term insurance, and with these policies, you can also borrow against the cash value to do something like paying for children’s education or investing in real estate.

Someone who might consider a cash value life insurance policy as part of their estate planning would tend to be a very wealthy person. Sometimes the very wealthy will use this as a way to set up a life insurance policy that would go into effect when the other spouse dies. This would then provide a way to pay the taxes on the portion of their estate that’s not highly liquid.

The Case Against Purchasing a Life Insurance Policy

Purchasing a life insurance policy is going to require you to pay a monthly premium. You personally are not going to ever realize the benefits of that policy in your lifetime. If you didn’t have a family you were concerned about providing for you if you died, there would be no reason to purchase a life insurance policy.

Also, the best life insurance policies can be pretty expensive. For example, whole life insurance or universal life insurance with all of the bells and whistles can be pretty costly.

If you’re considering a life insurance policy as an investment vehicle, you might want to really think about the long-term rate of return that you could achieve. First, there is no investment potential with a term life policy. However, there is with a whole life policy, but would you be better off investing your money somewhere with a higher return, such as the stock market? You could still provide for your family by investing your money elsewhere if you created a trust or named them beneficiaries of your account and you wouldn't have to pay life insurance premiums.

Deciding Whether to Purchase a Policy

The following are some examples of when you might not need a life insurance policy:

If you have accumulated enough assets that you can take care of yourself independently

If your children are grown and are working and supporting themselves or don’t require any help from you

If you are very wealthy, a whole life insurance policy can be part of an estate plan. If you aren’t very wealthy but you have young children or a spouse who depends on your income, a term life insurance policy may be a good option.

You can then replace your income if you die, at least for a period of time. This is important when children or a spouse aren’t able to provide for themselves or if they would be greatly impacted by the loss of income your death would create.

Consider these factors as you’re deciding whether or not whole or term life insurance could be right for you:

Your age

Your health

Your family's financial needs

Your funeral plans and how much they will cost

The age of your children

What your plans are if you became ill or disabled

Your current level of debt

Your mortgage payments

When you plan to retire and what kind of retirement accounts and plans you currently have in place

Whether or not estate taxes could be a concern for you

If you will create a trust as part of your estate planning

Bottom Line

A permanent life insurance policy can be a good investment and savings tool for certain people—in particular, high-net-worth individuals. It can be especially useful as a way to help minimize owed estate taxes in the event of someone’s death. Because term life has no cash value, it’s not necessarily considered an investment, but a young family or someone with a spouse who depends on their income may find it’s wise to purchase life insurance for peace of mind and protection for their family.

Life insurance has its benefits, but it’s not a cure-all that eliminates the need for any other long-term or retirement planning.

If you are considering purchasing any life insurance policy, it’s important to talk to multiple providers. Get different quotes, see what insurance options are available with specific policies, and learn more about how much it will cost you each month versus the potential benefits you or your family could derive from the policy.

Author: Ashley Sutphin

Ashley Sutphin Watkins is a graduate of UNC-Chapel Hill where she studied journalism. She has worked as a journalist, content creator, and copywriter for nearly a decade, with a focus on personal finance, real estate, and healthcare. She now lives in Knoxville with her husband and young kids. During her free time, she enjoys traveling and enjoying the outdoors in East Tennessee.

1 Comment

Whole Life a good investment? If you don’t mind waiting 30 years to get an illustrated return of 5 percent. Drop it after 10 years and get a negative return. And per the Society of Actuaries 40 percent are no longer in force after 10 years. It is only a good return for the person and company selling it.

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